Reebok: A Lesson In Investor Patience

We think of Google (NASDAQ:GOOGL) in 2004 (see the Corner column in Monday's IBD) or Michael Kors (NYSE:KORS) in 2011. We're cutting them slack because we know institutional investors can't wait to start building positions in these fast-growing companies.

But, sometimes, an IPO builds a conventional base, just like it's been a public company for a number of years. Such was the case with British sneaker maker Reebok in 1986.

Reebok went public in July 30, 1985. It had the bad luck to come out when the general market was in a correction. The S&P 500 corrected 8% between July 17 and Sept. 26.

Reebok quickly built an IPO base that corrected nearly 18% and was built over 17 days. It poked above the base Aug. 29 (1), but had trouble making real progress. It moved sideways, ran up and back down again. (Prices on the weekly chart are adjusted for a 3-for-1 split in June 1986.)

Its first lesson: Don't buy during a correction. IPOs, being more risky anyway, are more likely to either fail or move so violently that you can't stay in them.

Reebok's second lesson: Wait for the right time to enter. An investor who tried to chase the stock would have been quickly run out. Patience in investing is a virtue.

After rising 46% above the low of its first IPO base, Reebok built a conventional cup-with-handle base (2). The base lasted 14 weeks and corrected 21%.

It had some positive characteristics that should have attracted the notice of the skilled chart reader. Volume during the four weeks of decline on the left side was quiet (3).

The fifth week turned out to be the bottom and it was a positive reversal. After being down for most of the week, the stock finished up by 0.5%. Volume picked up and was above average.

That tells you that institutional investors saw a chance to pick up shares cheaply.

The handle had an unusual few days of trade. The stock dropped below its 10-week moving average, and volume was high.

In this case, that's OK. The stock quickly recovered and it served as a sufficient last shakeout of weak holders.

It broke out Feb. 3, 1986, past 29.35 (the price before a 3-for-1 split). Volume was 303% above average. Reebok was off to the races, up 261% in four months before making a new base.

We often think of IPO bases as being shorter than a normal base.

We think of Google (NASDAQ:GOOGL) in 2004 (see the Corner column in Monday's IBD) or Michael Kors (NYSE:KORS) in 2011. We're cutting them slack because we know institutional investors can't wait to start building positions in these fast-growing companies.

But, sometimes, an IPO builds a conventional base, just like it's been a public company for a number of years. Such was the case with British sneaker maker Reebok in 1986.

Reebok went public in July 30, 1985. It had the bad luck to come out when the general market was in a correction. The S&P 500 corrected 8% between July 17 and Sept. 26.

Reebok quickly built an IPO base that corrected nearly 18% and was built over 17 days. It poked above the base Aug. 29 (1), but had trouble making real progress. It moved sideways, ran up and back down again. (Prices on the weekly chart are adjusted for a 3-for-1 split in June 1986.)

Its first lesson: Don't buy during a correction. IPOs, being more risky anyway, are more likely to either fail or move so violently that you can't stay in them.

Reebok's second lesson: Wait for the right time to enter. An investor who tried to chase the stock would have been quickly run out. Patience in investing is a virtue.

After rising 46% above the low of its first IPO base, Reebok built a conventional cup-with-handle base (2). The base lasted 14 weeks and corrected 21%.

It had some positive characteristics that should have attracted the notice of the skilled chart reader. Volume during the four weeks of decline on the left side was quiet (3).

The fifth week turned out to be the bottom and it was a positive reversal. After being down for most of the week, the stock finished up by 0.5%. Volume picked up and was above average.

That tells you that institutional investors saw a chance to pick up shares cheaply.

The handle had an unusual few days of trade. The stock dropped below its 10-week moving average, and volume was high.

In this case, that's OK. The stock quickly recovered and it served as a sufficient last shakeout of weak holders.

It broke out Feb. 3, 1986, past 29.35 (the price before a 3-for-1 split). Volume was 303% above average. Reebok was off to the races, up 261% in four months before making a new base.

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03/02/2015 06:45 PM ET

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